HACE 3200 1nd Edition Lecture 28Outline of Last Lecture I. Mutual FundsII. Types of Investment CompaniesIII. Investment TrustsOutline of Current LectureI. Retirement PlanningII. Social Security III. Pension PlansCurrent Lecture- Chapter 16: Retirement Planningo Think: Where and when do you plan on retiring?- Age?- Location?- Amount in retirement account?- Retirement- It’s up to you!o Start saving today- although retirement seems a long way away!o Employer benefits are reduced or simply not availableo The future of government benefits, Social Security, is questionable. - Retirement is like a 3 legged stoolo 1.Social securityo 2.Employer contributionso 3.Personal Savings Contributions - The Aspects of Social Securityo Mandatory federal insurance program providing Retirement, disability, and survivor benefitso Paid for with a federal tax- FICA 6.2% of your first $117,000 in 2014 pay for social security 1.45% of your total earning pay for MedicareThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. Equal match by your employer- Social Security Eligibilityo In the year 2014, you must have earned 1,200 in covered earnings to get one social security or Medicare work credit and $4,800 to get the maximum four credits for the year.o You must be 65 years of age to receive full benefits but will gradually increase to 67 in 2022o Reduced benefits may begin at age 62- Determinants of Social Security Retirement Benefitso Number of years of earningso Average level of earningso Inflationo Age you begin receiving benefitso Replaces approximately 42% of your lifetime average annual income, with adjustment down for higher income earners and up for lower income earners- Earnings Limits on Social Security Benefitso Prior to 2000, earnings limits reduced Social Security benefits for many older workerso Senior Citizen’s Freedom to Work act of 2000 eliminated the retirement earnings limit- Disability and Survivor Benefitso Disability benefits for those physically or mentally impaired Impairment expected to resulting death Impairment prevents “substantial work” for a least one yearo Survivor’s benefitso Small payment to defray funeral costs($275)o Continuing monthly payments to spouse, children, or parents—with restrictions- Employer- Funded Pensionso 1. Defined Benefit planso 2. Cash balance plans- Pension Plano A contractual arrangement in which the employer provides benefits to employees upon retirement. Many plans include disability ad death benefits. A pension plan involves recognizing the employer’s cost and the funding of pensionbenefits. Pension expenses are tax- deductible to the employer.o The employer is taxed when the pension annuity( payment to you at retirement) is received from employer contributions or from originally “not taxed” employee contributions Meaning you didn’t pay taxes on the money when you put it in the retirement account so you pay taxes on the money when you draw on it at retirement- Pension Plano The two most common types of plan s are A) defined Benefit pension plan and B)defined contribution pension plano Pension plan provisions vary from company to company. For example, the pension plan may contributory or noncontributory - Contributory and Noncontributory planso Contributory- both you and your boss pay toward your retiremento Noncontributory- only your employer oats toward your retirement- Employer-funded Pensionso One in which the employer contributes pension funds to a trustee who manages the fund and pays employees from the fund when they retire.- Pension Termso Unfunded- pensions are paid out of current company earnings or pay-as-you-goo Vesting period- required length of employment to be eligible to receive company paid pension benefits- A. Defined Benefit Plano Program stipulating the pension benefits employees will obtain when they retireo The pension benefit formula usually is based on the worker’s salary level nearing retirement age and considers the employment yearso The calculation must take into account the current year employer contribution tosatisfy expected pension benefit payments at retiremento Considered in the funding level are- Defined Benefit Plan- limitationso Lack of portability- pension does not go with you if you leave the companyo Company changes in the plan with little noticeo Few plans adjust benefits for inflationo Some are unfunded plans that lack safety - B. Defined Contribution Pension Plano Program under which an employer agrees to make a specified contribution each year based on the pension benefit formulao Agree to pay into pension on your behalfo The formula may consider such factors as years of service, salary, levels, and ageo Note that only the employers contribution is defined and that there is no guarantee regarding the future benefits to be received by employeeso We’ll put money in there for ya but aint giving you no guarantees that it will be there when you want it at retirement- 2. Cash-balance Pension Plans: A New twist on Defined- benefit planso hybrid pension plano on the basis of this formula percentage of salary predetermined rate of interest earnings can roll to IRA when leaving- Cash balance Pension Planso When a participant becomes entitles to receive benefits the benefits received aredefined in terms of an account balance- Pros and Conso Pros Retirement benefits are easy on track Benefits younger employees who can start to build benefits faster Portability o Cons No choice on investment decision and earnings are limited to the stated rate Reduced benefits for older workers- Employer- Sponsored Planso A. Defined- contribution You and your employer or employer alone contribute to retirement account- Defined Contributiono Profit-sharing planso Money purchase planso Thrift and savings planso Employee stock ownership plans- Profit sharing planso Employer contributions can vary yearly due to profitabilityo Contributions can depend on your salary levelo Some firs set minimums and maximumso Contributions are not guaranteed- Money Purchase Planso Employer contributions on shares a set percentage of your salaryo Contributions are guaranteedo Preferred over profit sharing plans because of the guaranteed contributions- Thrift and Savings Planso Employers match a set percentage of your